Economists have warned the government faces a stark choice: tax hikes or deep cuts to public services, to fund a required boost in defence spending.
Amid intensifying calls for greater defence investment due to the Middle East conflict, the Institute for Fiscal Studies (IFS) said meeting Nato’s 3.5% of national income target would cost an additional £35 billion annually. This figure, significantly more than the UK's current 2.4% allocation, is equivalent to the combined budgets of the Ministry of Justice and the Home Office.
The IFS highlighted the scale of the challenge, suggesting such funding could necessitate a 3 to 3.5 percentage point rise in the main rate of VAT.
IFS director Helen Miller said: “The takeaway is that we should not expect the Government to be able to meaningfully increase what we spend on defence – if that’s what it decides it wants to do – without significantly cutting other Government programmes or raising taxes.”
She said the events in the Middle East and the market reactions represented the “big economic news” on Wednesday, rather than the spring statement delivered by Rachel Reeves.
Ms Miller added: “Gas prices rose by more than 20% yesterday and are up almost 80% compared to Friday. The stock market fell almost 3%. The cost of borrowing rose sharply. Maybe these changes will be short-lived. There are many days with large market moves that we quickly forget.
“But if war in the Middle East drags on that will be unambiguously bad news for all of us, including for the Chancellor.
“On the economic front, higher oil and gas prices and more economic uncertainty would drag on economic growth. Disposable incomes would fall as inflation rises. Higher inflation would likely mean higher interest rates.
“We should all hope that we are not facing a protracted conflict.”
